It’s been a while since I discussed gold in any detail on my blog. And even though I still hold the belief that nothing has been “fixed” in the global economy (just can kicking), it made no sense to keep discussing gold. With gold being in a 3 year bear market and all.
A Gold Shortage?
However a different angle on the gold market has arisen. The idea that there isn’t enough of it. Kathy Derbes, who deals in gold, wrote a recent piece on the potential shortage of gold if holders of gold futures contracts tried to claim physical delivery of their contracts.
As a side note: What’s most interesting is that this is yet another topic that “alarmist” libertarian blog Zero Hedge has brought up repeatedly for some time (recently HERE and HERE). They keep reporting interesting angles that sound alarmist to me (and I have libertarian leanings) but end up often being found true.
Many discussions on gold will often admit that there is “plenty” of the shiny yellow metal. The usual metaphor is the one that says that all the gold in the world would fill an olympic sized swimming pool. Warren Buffett has offered the same joking reference to gold when he talks about some people digging it out of the ground, only to bury it again (in a vault).
A Gold Shortage Explained: Major Commodity Dealers Overpromise
So if there is plenty, what is Kathy talking about? What would cause a gold shortage? It’s the idea that a small amount of gold in the vaults of commodities dealers (like JP Morgan) is being used to back multiple contracts.
Metaphorically speaking, it’s as if 10 people own contracts that represent 10 oz of gold but only one real ounce backs those 10 different contracts.
All you’d need is two people deciding at the same time to claim the physical gold delivery for there to be a problem.
The problem could cause chaos in the gold market. Where did all of the physical gold go? Of course to the people who have historically mistrusted paper “money” and prefer something real – Asians (read Chinese and Indians).
Westerners are being increasingly left to pass around paper gold because the real stuff is mostly gone overseas. Never to return.
Read Kathy’s article for a full explanation.
Gold Shortage Action Item Ideas
A gold shortage problem, and the chaotic scramble for supply that would result from this being true, would make cheap gold discovery mining stocks very valuable.
One potentially helpful resource for putting together a portfolio of emerging discovery gold stocks is Brent Cook. He is a geologist who writes a newsletter on gold stocks. He tells people what he is personally investing in.
I have already begun adding gold exposure back to my client portfolios. Want to learn more? Click HERE
featured image via Anthony Joh on Flickr.